The Housing Bubble in the United States also preceded the drop in interest rates. The period from 1996-2000 coincided with large increase in proerty values in hot urban areas all over the US. San Fran, Silicon Valley, Seattle, Portland, Denver, Los Angeles, San Diego, Phoenix, Dallas, Miami, New York, Dallas, Raleigh/Durham, Washington, Philadelphia, Ann Arbor, Minneapolis, Boston, NY, in fact NJ and Connecticut as well. The smaller cities only started to benefit after the rates were dropped.

There is definitely a housing bubble in many of the areas I just menioned. However, I would note that economists in the US forecast interest rates will go down in the second half of 2006, so the artificial inducements may remain. Furthermore, the pollyannas--after a decade of low rates--are beginning to think this is a blueprint for the future (apprarently they've forgotten the 1960s).

Lastly, I'd like to see population density included in these figures. Is there a corresponding rise in population and housing costs in the "hot" urban centers? One would think so. But I contend this is not the case. One phenonmenon that's occurring is that people are moving out of shared housing situations and owning their own places, so you have fewer people under roofs. In fact, Boston and San Fran had skyrocketing housing costs at the same time they experienced a net loss in population. This is very true in the old industrial city where I live. This town had 1 million inhabitants 30-40 years ago, and now there are only 300,000 people here, and yet the homes are still occupied.

You may think that the housing market, whose foundations having been looking increasingly shaky over the past year, would be shored up by last week's interest rate cut from the Bank of England.

After all, you may say, rising interest rates did for the housing market last year and so the cut, the first for two years, must have the opposite effect. If money is cheaper, people might borrow more and start buying property again.

That is a dangerously complacent view. The house price bubble, the biggest this country has ever seen, was pricked last summer and has been losing air ever since. But it has barely begun to deflate in a serious fashion.

(snip)

The Royal Institution of Chartered Surveyors' monthly survey of surveyors - one of the most reliable housing market indicators - is still pointing to sharp price falls. And now, the main price indicators from the Nationwide and Halifax are showing annual price inflation slowing rapidly. The Halifax reported on Friday that prices were only 2.3% higher than a year ago, a nine-year low.

Fairly soon, probably in October or November, this annual rate could turn negative. There is no reason for it to stop at zero. Then any lingering pretence that bricks and mortar remain a rock-solid investment will have gone.

This could be a key psychological blow to the housing market. Over the past year, you could hear people saying things like, "My house price may have dipped this month but it is still 10% higher than a year ago."

And the knock-on effects on the economy could be grave. Already household spending has slowed sharply, as has mortgage-equity withdrawal, where people add to their mortgage to spend on other things. This has hit the retail sector hard and has slowed the whole economy down faster than the Bank of England had expected. This is why the Bank cut rates last week. Slower growth leads to slower inflation and its remit is not to let inflation slow too far.

(snip)

To get a broader perspective on the house price bubble, it is worth looking at other countries. Britain's bubble is far from unique. Indeed, it is clear that the wave of interest rate cuts around the world in the wake of the bursting of the dotcom bubble five years ago, which saw shares tumble 50%, created a boom in housing instead.

All across the rich world, with the exception of Germany and Japan, house prices have been booming. The United States, France, Spain and Ireland are just a few of the countries that have seen double-digit property price rises in recent years. The resultant increase in (largely illusory) wealth has been bigger than the dotcom bubble.

And the correction now seems to have started in Britain, Australia and the Netherlands. Prices are still steaming away in France and the US and many other countries, but the warning signs are flashing. Prices in Sydney are down 16% in two years, according to international comparisons done by the Economist. Why shouldn't that happen in London, where prices are already down 3-5% on some measures?

But any way you look at it, it is clear the correction has only just begun.

In Britain the slowdown in consumer spending has occurred with house prices standing still. If and when prices start to fall, there could be trouble for the economy. The Netherlands is stuck in recession after its house price boom turned to bust a few years ago. The Japanese property market has been falling for 14 years since its bubble burst.

The link to consumer spending and therefore GDP growth seems based on more or less (depending on which country) refinancing of mortgages, but also on the "wealth effect", (by which I feel richer because the dotcom I bought six months ago or the house I bought a few years ago have doubled in "value"). (When I say I...) In either case there's debt involved, and the collateral is largely bubble gas...

...Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

In the nation as a whole, housing prices rose about 50 percent between the first quarter of 2000 and the first quarter of 2005. But that average blends results from Flatland metropolitan areas like Houston and Atlanta, where prices rose 26 and 29 percent respectively, with results from Zoned Zone areas like New York, Miami and San Diego, where prices rose 77, 96 and 118 percent.

Nobody would pay San Diego prices without believing that prices will continue to rise. Rents rose much more slowly than prices: the Bureau of Labor Statistics index of "owners' equivalent rent" rose only 27 percent from late 1999 to late 2004. Business Week reports that by 2004 the cost of renting a house in San Diego was only 40 percent of the cost of owning a similar house - even taking into account low interest rates on mortgages. So it makes sense to buy in San Diego only if you believe that prices will keep rising rapidly, generating big capital gains. That's pretty much the definition of a bubble.

Bubbles end when people stop believing that big capital gains are a sure thing. That's what happened in San Diego at the end of its last housing bubble: after a rapid rise, house prices peaked in 1990. Soon there was a glut of houses on the market, and prices began falling. By 1996, they had declined about 25 percent after adjusting for inflation.

And that's what's happening in San Diego right now, after a rise in house prices that dwarfs the boom of the 1980's. The number of single-family houses and condos on the market has doubled over the past year. "Homes that a year or two ago sold virtually overnight - in many cases triggering bidding wars - are on the market for weeks," reports The Los Angeles Times. The same thing is happening in other formerly hot markets.

Meanwhile, the U.S. economy has become deeply dependent on the housing bubble. The economic recovery since 2001 has been disappointing in many ways, but it wouldn't have happened at all without soaring spending on residential construction, plus a surge in consumer spending largely based on mortgage refinancing. Did I mention that the personal savings rate has fallen to zero?

Now we're starting to hear a hissing sound, as the air begins to leak out of the bubble...

Commenter b on MoA adds this:

He is a bit late - the main indicator some used was the price of lumber futures. They started to break down nearly a year ago. House price deflation is sloooow.

and sends us to look at this (from AGEdwards):

(click for source)